Company Performance
The typical aim for employee rewards is to incentivise and motivate individual employee performance with a view that, in aggregate, this will lead to greater company performance. However, there are also cases where incentives are explicitly tied to measures of company performance, particularly for plans targeted at senior executives. This page seeks to summarise some of these measures as they should generally be well understood by reward professionals. Share price A very basic measure which is simply how much people are currently paying to purchase a single unit of a company's stock. People seek to own equity in a company so that they can recieve a portion of the company's profit when the company pays out a dividend. People can also seek to make a return on their investment in a company by selling their stock at a higher level than what they purchased it at. In order for a share price to go up the market would generally need to have a view that the company's financial performance was increasing and the company would therefore be likely to release a higher dividend in the future. Some companies have seldom released dividends in the past, such as Apple, although people still purchase stocks in these companies in the expectation of dividend releases in the future or to capitalise on future share price increases. Market Capitalisation A publicly traded company's market capitalisation is the total value of their outstanding shares. It is effectively the number of shares multiplied by the current share price and can be used as a measure of a company's relative size. It is a measure of the public's view of the overall equity value of a company based on their views of the future earnings capability of that company. See Investopedia definition . Earnings Per Share (EPS) The net income of a company minus the dividends paid out on preferred stock in the prior year divided by the number of outstanding shares in the company. Investors pay careful attention to this number as it represents the theoretical amount of profit attibutable to each unit of ordinary share ownership. An investor might look at a company's EPS to gain an understanding of the potential relative profitability of the company that they are looking to invest in. A commonly used variant of this statistic is the 'diluted' Earnings Per Share which also takes into account the number of stock options, warrants or preferential shares convertable into common stock which all have the potential to 'dilute' the value of ordinary shares. See Investopedia definition . Total Shareholder Return (TSR) The financial return, expressed as a percentage, of an investment in a publicly traded company. It includes both the capital gains (increase / decrease in share price) and dividends released during the time period in question. Total Shareholder Return is a popular measure of how well an investment in a company has performed for investors. See Wikipedia definition . Price - Earnings Ratio (P/E Ratio) The current Share Price as a percentage of the Earnings Per Share of a given stock. This is perhaps the most popular measure of a stock's performance as it shows what investors are currently willing to pay for a stock in relation to the company's earnings (profits) over the prior year. As the resulting figure is effectively how many times more expensive it is to purchase a stock in comparison to the prior year's profitability for that stock it can be viewed as a proxy for how many years the investment will take to "pay itself off" (assuming 100% of profits are returned as dividends over this time). A high P/E Ratio means that investors are willing to pay many times more than the company's earnings in order to secure their own equity in that company. A relatively low P/E Ratio means that a stock is trading at a discount in relation to its prior earnings. A reason for both of these is that the future anticipated value of the stock is higher or lower than it has been previously. Different industries will tend to have different earnings potentials and risks involved in their operations. Therefore, it is important to select appropriate comparators when viewing a given company's PE Ratio. See Investopedia defintion Return On Equity (ROE) A company's Net Income as a percentage of shareholders equity. In this case, shareholders equity is defined as the difference between a company's assets and liabilities or in other words the book value / intrinsic economic value of the firm. This view of equity differs from Market Capitalisation as the later term refers to the market's '''current view of the firm's value which is determined by the firm's share price and investors' views of future profitability. Investors will tend to focus on the market's view of a firm's value (i.e., the Earnings Per Share) as this will more closely predict their potential future gains from the firm's profitability. However, ROE is still of great interest as it reflects the overall efficiency of the firm in delivering returns on capital. See Motley Fool explanation . Dividends / Dividend Yield Dividends are those payments made to shareholders as a way of returning profits to equity holders of the firm. Companies may make dividend payments at multiple times in the year dependent on their own committments to shareholders and their profitability. A dividend payment is allocated on a per share basis. See Wikipedia definition . The Dividend Yield is the prior dividend paid multiplied by the number of times per year that a company typically pays a dividend (thereby annualising the last dividend payment) as a percentage of the current share price. Therefore, the dividend yield can be viewed as those returns on share ownership delivered as dividends. A more complete measure of returns on share ownership would be the Total Shareholder Return (TSR) statistic which also includes the capital gains associated with the change in share price over time and makes use of the starting share price rather than the current share price. See Investopedia definition . Beta (β) The degree to which a share price moves "in step" with the overall market and, as such, is a measure of the relative volatility of a share price in relation to its respective market. This is effectively the magnitude to which variations in a given stock can be predicted from movements in the parent market. This value is determined via regression analysis with a value of 1 signifying perfect alignment between a share price's movement and the movement of the overall market benchmark (e.g., the FTSE 100). A value in excess of 1 means that a stock tends to move in the same direction as the market but with more excessively so and a positive value less than 1 meaning that a stock tends to move in the same direction as the market but with less volatility. E.g., a stock with a beta of 2 means that a stock tends to move with twice the volatility of the market. If the market moves 3% in a positive direction then the stock will rise, on average, by 6%. An investor might take note of a stock's beta value when they are attempting to diversify their portfolio. By looking at different beta values they can select stocks that will either be relatively non-volitile (beta values less than 1), about as volitile as the overall market (beta values close to 1), highly volitile (beta values somewhat greater than 1) or even stocks which tend to move in the opposite direction than the overall market (negative beta values). The general idea is that differing volatilities will be associated with differing potentials for returns and that by having a diversified portfolio losses in one stock can be balanced by gains in another. When looking at the performance of an individual asset manager it might also be useful to look at the respective beta values of their investments. If the beta values are high then their returns may be best explained by the fact that they took relatively risky market positions rather than that they were overly skilled in the selection of their investments. Gross Revenue Gross revenue (aka. turnover) is the top line earnings / income number signifying the amount of money that a company has made in a given time period from the sale of products and services (usually over the course of a year). It is a strong indicator of the economic strength of a company although it excludes the costs of doing business (i.e., expenses) and so is potentially not as useful to investors as a company's Net Profit. See Wikipedia definition . Gross Profit The simplest measure of profit which simply deducts the cost of goods from a company's gross revenues. It does not take into account the other costs of doing business such as salary costs, interest payments and depreciation on assets. See Investopedia definition . Net Profit A company's net profit (aka net earnings, net income or the bottom line) is the amount of money left over from Gross Revenues once '''all expenses such as cost of goods, rents, salary costs and interest payments have been deducted. This statistics is highly useful as it provides a measure of how well a company has created value for its investors through its operations. A company's profit margin is the ratio of net profit to gross revenue. A company with relatively higher revenues or lower expenses will have a higher profit margin. See Wikipedia definition . Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA) EBITDA is effectively Net Profit with interest payments, taxes, depreciation and amortisation added back in. This statistic is useful when comparing the performance of different companies and industries as the above elements more reflect the accounting / financing decision making and tax environment of the firm. That said, ultimate returns will be based on the true bottom line (Net Profit) so an investor would never look at this statistic in isolation. A similar statistic is Earnings Before Interest, Taxes and Amortisation (EBITA) which includes the depression of assets. See Investopedia defintion .